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July 26, 2012

Sandy Weill Wants Banks Small Again, Chris Dodd Wants Them Big

If politics makes strange bedfellows, it also makes for strange adversaries.

One day after former Citigroup chairman Sanford Weill’s startling remarks on CNBC that U.S. financial conglomerates should be broken up, former Sen. Christopher Dodd—one of the sponsors of Dodd-Frank—says a return to Glass-Steagall would be impractical.

“Just breaking up the banks is not the solution,” Dodd told CNBC’s Squawk Box.

He called for giving his signature legislation, which turned 2 years old last week, a chance to work.

Dodd-Frank takes a regulatory approach to oversight of the nation’s largest financial institutions, rather than seeking to reduce their size. In fact, the nation’s five largest financial institutions are bigger today than they were before the financial crisis, with assets equal to about 56% of the nation’s GDP compared with about 43% in 2007.

So Dodd (left), who along with his legislative partner, Rep. Barney Frank, D-Mass., was thought to be the scourge of Wall Street, wants to keep banks big, while Weill, who oversaw the formation of the then-unprecedented banking giant Citigroup, says we ought to reverse course.

Weill played a key role in the repeal of Glass-Steagall, the Depression-era law that kept deposit institutions separate from investment banking and insurance. He personally lobbied former President Bill Clinton to support repeal, which was effected in legislation enacted in 1999.

On Wednesday, Weill was repentant:

“What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail,” he told CNBC’s Squawk Box.

In contrast, Dodd has long backed Wall Street’s notion that it is competitively important for U.S. banks to maintain their size and scope. In 2010, before Dodd-Frank’s passage, he promised his proposed legislation would not reduce banks’ global footprint: “We are not going to strangle or suffocate or cause the United States to lose world leadership and financial services,” he told CNBC at the time.

That sentiment was echoed by the banking titan Jamie Dimon, CEO pf JPMorgan Chase & Co., who earlier this month answered Credit Agricole analyst Mike Mayo’s question about whether JPMorgan shareholders would be better served by a breakup of the firm. “I beg to differ,” was Dimon’s response on the investor call.

Today, Mayo, reacting to Weill’s idea on Bloomberg TV, said a breakup of financial conglomerates would unlock enormous value for shareholders. Those shorting Morgan Stanley, for example, would be “blown to Neptune” if the firm got split up, Mayo said.

Speaking on Squawk Box, Weill hearkened to the days when banks traded at five times book value and said that today’s banks are trading at just a third to a half of book value, saying financial institutions would be much more profitable broken up.

Weill’s new breakup stance puts him in the rarified company of longtime critics of banking behemoths, including former FDIC chairwoman Sheila Bair, author and former IMF chief economist Simon Johnson, Dallas Fed president Richard Fisher and Bank of England Governor Mervyn King.